Kenya Banks, Economy Seen Winning as Rate-Cap Law Annulled

NAIROBI (Capital Markets in Africa) – Kenyan banks might turn the lending taps back on after a court ordered lawmakers to review a law that capped the interest rates they can charge, potentially providing further impetus to economic growth.

Shares in the East African nation’s largest lenders rallied after a Nairobi High Court on Thursday described the legislation governing the rate caps as “vague, imprecise, ambiguous and indefinite.” The court suspended the implementation of the ruling for 12 months to give lawmakers an opportunity to reconsider the provisions, according to the judgment.

“The banks are the winners here,” EFG-Hermes head of research, Kato Mukurusaid Friday. “This will undoubtedly be supportive of bank earnings, but also the Kenyan economy, which was starved of liquidity.”

The government imposed the cap at 4 percentage points above the central bank rate in August 2016 to fulfill an election-campaign pledge by President Uhuru Kenyatta to improve lending terms for consumers, against the advice of the central bank and the National Treasury. The limit has cut into lenders’ profit margins, forcing them to be more selective in who they provide money to, even sending consumers to borrow from unregulated micro-lenders at much higher rates.

Credit Slows
Equity Group Holdings Plc, Kenya’s biggest lender by market value, gained 2.5 percent to 43 shillings by 6:25 p.m. in Nairobi. KCB Group Ltd. rose 2.3 percent to 44.3 shillings, while Co-operative Bank of Kenya Ltd. gained 3.46 percent to 14.95 shillings.

The period before enforcement will allow the “regulator to put in place appropriate mechanisms,” the Central Bank of Kenya said on its Twitter account after the ruling. The Monetary Policy Committee is scheduled to review the benchmark interest rate on March 27.

The central bank “will find monetary policy marginally more effective since the cost of capital will no longer be artificially priced,” Deepak Dave, founder of Nairobi-based Riverside Capital Advisory.

Lawmakers will regroup to study the court’s ruling, said Samuel Atandi, a member of the finance and national planning parliamentary committee. Parliament will amend the law if convinced it has shortcomings. If not, “we will go to court,” Atandi said by phone.

The Consumer Federation of Kenya, which was enjoined in the case as an interested party, is considering appealing the decision, said Stephen Mutoro, its secretary general.

Not Served Purpose
“The intention of imposing a rate cap was to make credit more affordable but it has not served its purpose,” said Kunal Ajmera, the chief operating officer at Grant Thornton in Nairobi. “Instead, there are plenty of evidence to suggest that the banks are not lending enough and when they do lend, they are being extremely cautious.”

Growth in private-sector credit averaged 2.4 percent in 2017 and 2018, compared with an annual 20 percent in the decade before the law came into effect, central bank data show.

“We are still not yet out of the woods.” Faith Mwangi, an analyst at Exotix Capital by phone. “It still has to go back to the national assembly, who are still within their right to put a ceiling. It’s too early to celebrate.”

Source: Bloomberg Business News